How to price occupied buy and holds for wholesale deal..?

Question

I do tenant placement in Baltimore, Maryland. I'm still a bit of a novice when it comes to wholesaling, simply because I haven't had many deals to gain the experience. But I do have my own buyers list. So, one of my investors is pretty much asking me to sell 30 of his properties. All have recently had work done to them within the last 5-6 years maybe. 26 out of 30 of them are occupied. 20 of those 30 is federally funded (section 8) tenants. He has given me each rental amount, CAP rate, and what he wants for it.

Here is an example of one of the properties:

Occupied property with a section 8 tenant in it is getting $1,359 per month. CAP Rate is 25.80%. Asking for $49,000. The property was bought in 2010 for $48,500.

My questions are:

What will this CAP rate mean for the next buyer?

How can I calculate to make sure that what he is asking for isn't too much and to make sure that I can also add on my fee?

In your opinion, how would you price this house to a new buyer including the wholesale fee?

Are there any questions or important pieces to the puzzle that I am not considering?

Thanks for any feed back and advice.

Account Closed · Answer

Here is an example of one of the properties:

Occupied  property with a section 8 tenant in it is getting $1,359 per month. CAP  Rate is 25.80%. Asking for $49,000. The property was bought in 2010 for  $48,500.(are you sure about the CAP rate of 25.80%, sounds impossible to me, perhaps someone is not calculating this number correctly.)

My questions are:

What will this CAP rate mean for the next buyer? (fantastic)

How can I calculate to make sure that what he is asking for isn't too much and to make sure that I can also add on my fee?(are you legally collecting a fee as an agent?)

In your opinion, how would you price this house to a new buyer including the wholesale fee?

Are there any questions or important pieces to the puzzle that I am not considering?

Thanks for any feed back and advice.

I'd be interested in more information. You can add me to your list.

Wishing you good luck.

Brittnie Stewart · Answer

Im honestly not too sure if the CAP Rate is correct seeing as though I dont even know how to calculate myself, nor do I understand exactly what it means or the significance of it.

I wasn't considering it to be an agents fee. I figured once I got it under contract that it wouldnt be any different than a wholesale deal. I don't see how it differs.

Jeff B. · Answer

I run the cash/cash backwards to determine it the listing price is rational.  Problem is the expenses, so

(GSI - GSI*0.3 ) * 10 is a rational price:

• the 10 is a Gross Rent Multiplier and arbitrary; but reasonable range is 8-12
• GSI*0.3 is an assumed expense ratio of 30%; higher will be high maintenance costs

so GSI * 70% * GRM of your choice = Purchase Price.

If you get a GRM > 15 (I've see as hi as 19) the seller is in trouble and over extended in the debit+profits

Jamal L. · Answer

@Brittnie Stewart

The Cap Rate is known as the Capitalization Rate. It is a measurement of the amount of return the investor gets on the money he or she invest.  This is calculated by dividing the  Net Operating Income  (NOI) into the Purchase or Sale amount of the property. To find out if this amount is accurate (25.80%) you would have to find out the expenses that the seller is paying on the property (exclude mortgage payments)  and subtract them from the amount of incoming rent (annually). Then divide that amount into the sale price.  Hope this helps.  If you are interested in learning more about Cap Rate I would suggest the book "What Every Real Estate Investor Needs To Know about Cash Flow and 36 Other Key Financial Measures" by Frank Gallinelli.

I also wholesale and invest in Baltimore if you need any help calculating or selling any properties  you can reach out to me directly.  If the numbers make sense Im defiantly interested.

Jeff B. · Answer

• "What will this CAP rate mean for the next buyer?"

ZIPPO.  Cap rates compare NOI/Sales price and that's an evaluation of one prospect against another - - so comps are required.

My buy&hold decision was based on cash-flow and the cash/cash return.  That's real money in the bank and I don't need comps to like/dislike.

My $0.02

Brittnie Stewart · Answer

My goal was to get them all under contract but I didnt know an accurate price in which to do it. Would it make any different if I had contracts on them

Russell Brazil · Answer

@Brittnie Stewart The situation you are describing is brokering real estate. If you are not a licensed agent, this is illegal in the state of Maryland, and I think in every state actually.

Wholesaling is selling a contract you have on a property, you must have equitable interest in the property.  An investor you know asking you to sell the property, that is just going to get you in huge amounts of trouble with the real estate commission. Im not positive, but I think the fine is $5,000 per violation, so at 30 properties you could be on the hook for $150,000 in fines. So in other words dont do it, lol.